Unification in financial sector supervision: The trade-off between central bank and single authority

Journal of Financial Regulation and Compliance

Volumn 12, Issue 2, 2004, Pages 151-169

  Masciandaro, Donato ^a  

^a BOCCONI UNIVERSITY   (Italy)

Author keywords

Central banks; Financial supervision; Institutions and law; Single financial authorities

Indexed keywords

EID: 84960917935     PISSN: 13581988     EISSN: 17400279     Source Type: Journal    
DOI: 10.1108/13581980410810768     Document Type: Article

References (94)

1. See the ‘classic’ Corrigan, G. (1987) ‘Financial market structure: A longer view’, Federal Reserve Bank of New York, New York.
2. See Dale, R. (1997) ‘Reorganising the regulation industry’, Financial Regulation Report, No. 2.
3. European Commission (2002) ‘The followup of the second mapping exercise on EU financial conglomerates’, Mixed Technical Group on the Prudential Regulation of Financial Conglomerates, Brussels.
4. De Luna Martinez, J. and Rose, T. A. (2003) ‘International survey of integrated financial sector supervision’, World Bank Policy Research working paper 3096.
5. Di Giorgio, G. and Di Noia, C. (2003) ‘Financial market regulation and supervision:How many peaks for the euro area?', Brooklyn Journal of International Law, No. 28, pp. 463-493.
6. See Kremers, J., Shoenmaker, D. and Wierts, P. (2003) ‘Cross sector supervision:Which model?', in Herring, R. and Litan, R. (eds) ‘Does the future belong to financial conglomerates?', Brookings Institution, Washington DC, which identifies the range of possible models for the structure of financial supervision at the national and European levels.
7. For a deeper analysis of the crisis of the sectoral approach, see Masciandaro, D. and Porta, A. (2004) ‘Single authority in financial market supervision: Lesson for EU enlargement’, in Masciandaro, D. (ed.) ‘Financial intermediation in the new Europe’, Edward Elgar, Cheltenham, (forthcoming).
8. Di Giorgio and Di Noia, (2003) ‘Single authority in financial market supervision: Lesson for EU enlargement’, in Masciandaro, D. (ed.) ‘Financial intermediation in the new Europe’, Edward Elgar, Cheltenham, (forthcoming).
9. Schoenmaker, D. (2003-2004) ‘Financial supervision: From national to European?', Financiële en Monetaire Studies, 22e jrg. nr. 1.
10. On the European financial regulation architecture debate, Refs 7-9 above and 11-18 below.
11. Schuler, M. (2003) ‘How do banking supervisors deal with Europe-wide systemic risk?', Centre for European Economic Research, Discussion Paper, No. 03-03.
12. Prati, A. and Schinasi, G. (1999) ‘Financial stability in European economic and monetary union’, Princeton Studies in International Finance, No. 86.
13. Padoa Schioppa, T. (2003) ‘Financial supervision: Inside or outside central banks’, in Kremers, J., Shoenmaker, D. and Wierts, P. (eds) ‘Financial supervision in Europe’, Edward Elgar, Cheltenham.
14. Vives, X. (2000) ‘Banking supervision in the European monetary union’, in Eijffinger, S. C. W., Koedijk, K. and Yeo, S. (eds) ‘Fiscal policy imbalances, the monetary transmission mechanism and prudential supervision: Issues facing Europe’s central bankers’, Centre for Economic Policy Research/European Summer Institute, London; European Commission (2000), ‘Institutional arrangements for the regulation and supervision of the financial sector’.
15. Favero, C., Freixas, X., Persson, T. and Wyplosz, C. (2000) ‘One money, many countries-Monitoring the European central bank’, London, CEPR.
16. European Central Bank (2002) ‘The role of central banks in prudential supervision’, www.ech.int.
17. OECD (2002) ‘Supervision of financial services in the OECD area’, Paris, April, and OECD (2001) ‘Consolidated supervision in theory and practice’, Committee on Financial Markets, Technical Paper, Paris, March.
18. Di Giorgio and Di Noia (2003) ‘Supervision of financial services in the OECD area’, Paris, April, and OECD (2001) ‘Consolidated supervision in theory and practice’, Committee on Financial Markets, Technical Paper, Paris, March.
19. In particular, for the European Financial Services Authority solution, see Eijffinger, S. C. W. (2001) ‘Should the European central bank be entrusted with banking supervision in Europe’, briefing paper on ‘The conduct of monetary policy and an evaluation of the economic situation in Europe’, Brussels, European Parliament, available at www.europarl.eu.int/comparl/econ/emu/default_en.htm
20. Vives (2001) below.
21. Vives, X. (2001) ‘Restructuring financial regulation in the european monetary union’, Journal of Financial Services Research, No. 19, pp. 57-82.
22. See Schoenmaker (2003) ‘Restructuring financial regulation in the european monetary union’, Journal of Financial Services Research, No. 19, pp. 57-82. (Ref. 9).
23. See De Luna Martinez and Rose (2003) ‘Restructuring financial regulation in the european monetary union’, Journal of Financial Services Research, No. 19, pp. 57-82 (Ref. 4).
24. For more details see Masciandaro, D. (2004) ‘Central banks or single financial authorities? A political delegation approach’, in Masciandaro, D. (ed.) ‘Central banks and single financial authorities in Europe’, Edward Elgar, Cheltenham, forthcoming.
25. For a survey see Masciandaro, D. (1995) ‘Designing a central bank: Social player, monetary agent or banking agent?', Open Economies Review, No. 6, pp. 399-410.
26. Berger, H., de Haan, J. and Eijffinger, S. C. W. (2000) ‘Central bank independence:An update of theory and evidence’, CESifo Working Paper, No. 255.
27. After the seminal central bank independence indices published in Grilli, V., Masciandaro, D. and Tabellini, G. (1991) ‘Political and monetary institutions and public financial policies in the industrialised countries’, Economic Policy, No. 13, pp. 341-376, followed by the Cukierman indicators (see
28. Cukierman, A. (1992) ‘Central bank strategy, credibility, and independence’, MIT Press, Cambridge MA), different indicators were proposed. For a discussion, see
29. Masciandaro (1995) ‘Central bank strategy, credibility, and independence’ (Ref. 25) above and
30. Berger et al. (2000) ‘Central bank strategy, credibility, and independence’ (Ref. 26).
31. See Masciandaro (1995) ‘Central bank strategy, credibility, and independence’ (Ref. 25).
32. Briault, C. (2002) ‘Revisiting the rationale for a single national financial services regulator’, FMG Special Paper, No. 135, London, LSE.
33. Schoenmaker (2003) ‘Revisiting the rationale for a single national financial services regulator’ (Ref. 9).
34. Masciandaro (2004) ‘Revisiting the rationale for a single national financial services regulator’ (Ref. 24).
35. Barth, J. R., Nolle, D. E., Phumiwasana T. and Yago, G. (2002) ‘A cross-country analysis of the bank supervisory framework and bank performance’, SSRN working paper;
36. Kremers et al. (2003) ‘A cross-country analysis of the bank supervisory framework and bank performance’ (Ref. 6)
37. Masciandaro (2004) ‘A cross-country analysis of the bank supervisory framework and bank performance’ (Ref. 24) reviewed the pros and cons of alternative supervisory regime.
38. Taylor, M. (1995) ‘Twin peaks: A regulatory structure for the new century’, Centre for the Study of Financial Innovation, London.
39. Goodhart, C., Hartmann, P., Llewellyn, D., Rojas-Suarez, L. and Weisbroad, S. (1998) ‘Financial regulation. Why, how and where now?', Routledge, London and New York.
40. Laslett, R. and Taylor, M. (1998) ‘Independence and accountability: Tweaking the Financial Services Authority’, Centre for the Study of Financial Innovation, London, Working Group on Regulation, Paper No. 3.
41. Briault, C. (1999) ‘The rationale for a single national financial services regulator’, FSA Occasional Paper.
42. Llewellyn, D. (1999) ‘Introduction: The institutional structure of regulatory agencies’, in Courtis, N. (ed.) ‘How countries supervise their banks, insurers and securities markets’, Central Bank Publication, London.
43. Lannoo, K. (2000) ‘Challanges to the structure of financial supervision in the EU’, 22nd SUERF Colloquium, Wien.
44. Abrams, R. K. and Taylor, M. W. (2001) ‘Assessing the case for unified sector supervision’, 2001 Risk Management and Insurance International Conference, available at http://ideas.repec.org/s/fmg/fmgsps. html.
45. Goodhart, C. (2002) ‘The organizational structure of banking supervision’, Financial Market Group, LSE, Economic Notes, Vol. 31, No. 1, p. 32.
46. Quintyn, M. and Taylor, M. (2002) ‘Regulatory and supervisory independence and financial stability’, IMF Working Paper.
47. Sources: see Masciandaro and Porta (2004) ‘Regulatory and supervisory independence and financial stability’ (Ref. 7), the information is updated to 2003.
48. See De Luna Martinez and Rose (2003) ‘Regulatory and supervisory independence and financial stability’ (Ref. 4).
49. Alternatively, an index (FAC Two) is proposed according to the following scale:5 = single authority for all three sectors (total number of supervisors = 1); 3 = single authority for two sectors (total number of supervisors = 2); 1 = independent specialised authority for each sector (total number of supervisors = 3). As shown in Masciandaro (2004) (Ref. 24), the econometric performances of the two indices (FAC and FAC Two) are quite similar.
50. Goodhart, C. and Shoenmaker, D. (1995) ‘Should the functions of monetary policy and banking supervision be separated?', Oxford Economic Papers, No. 47, pp. 539-560.
51. Masciandaro, D. (1993) ‘Central bank independence, banking supervision and inflation’, IGIER Working Paper, No. 53.
52. Masciandaro (1995) ‘Central bank independence, banking supervision and inflation’ (Ref. 25).
53. Tuya, J. and Zamalloa, L. (1994) ‘Issues on placing banking supervision in the central bank’, in Balino, T. and Cottarelli, C. (eds) ‘Frameworks for monetary stability:Policy issues and country experiences’, International Monetary Fund, Washington.
54. Di Giorgio, G. and Di Noia, C. (1999) ‘Should banking supervision and monetary policy tasks be given to different agencies?', International Finance, 3.
55. Bruni, F. (2001) ‘Financial stability, regulation, supervision and modern central banking’, in Santomero, A. M., Viotti, S. and Vredin, A. (eds) ‘Challenges for central banking’, Kluwer Academic Publishers, Dordrecht.
56. Garcia Herrero, A. and del Rio, P. (2003) ‘Implication of the design of monetary policy for financial stability’, 24th SUERF Colloquium, Tallin, Estonia, analysed the relationship between financial stability and monetary policy design, finding that focusing the central bank objectives on price stability reduces the likelihood of instability and that the same is true when regulatory and supervisory responsibilities are assigned to the central bank.
57. Barth et al. (2002) ‘Implication of the design of monetary policy for financial stability’ (Ref. 25). claim that the key issues for banking supervision are 1) whether there should be one or multiple supervisory authorities and 2) whether the central bank should be involved in bank supervision. Here the same intuition is used to build up the two indices of concentration of financial authority.
58. The relationship between competition policies and stability are examined in Carletti, E. and Hartmann, P. (2002) ‘Competition and stability: What’s special about banking?', European Central Bank, Working Paper Series, No. 146.
59. Llewellyn, D. (2001) ‘Unified financial supervision: Some key issues and perspectives’, available through www.fin.ee/?id=3528&langchange=1, noted that the basic functions performed by regulatory and supervisory agencies cover ten main areas. For the purposes of this paper, in order to separate supervision-monitoring rules compliance-from regulation-rules setting with managerial discretion-five supervisory functions can be distinguished (prudential supervision of financial institutions, conduct of business supervision, administration of deposit insurance, market integrity, financial institution crisis procedures) from four regulatory functions (management of the payment system, prudential regulation, conduct of business regulation, liquidity management). Obviously, however, in different cases it is not easy to make a clear-cut separation between supervision and regulation. On this point of view, the overlapping between liquidity management and crisis procedures is paradigmatic.
60. Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, South Korea, Spain, Sweden, Switzerland, Turkey, UK, USA.
61. Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK.
62. Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic, Slovenia.
63. Bulgaria, Romania and Turkey.
64. See Garcia Herrero and Del Rio (2003) Bulgaria, Romania and Turkey (Ref. 51).
65. On the role of central bank in banking supervision see Goodhart and Schoenmaker (1995) Bulgaria, Romania and Turkey (Ref. 45).
66. Haubrich, J. G. (1996) ‘Combining bank supervision and monetary policy’, Economic Commentary, Federal Reserve Bank of Cleveland, November.
67. Peek, J., Rosengren, E. S. and Tootle, G. M. B. (1999) ‘Is bank supervision central to central banking?', The Quarterly Journal of Economics, No. 64, pp. 629-653.
68. Abrams and Taylor (2001) Is bank supervision central to central banking?', The Quarterly Journal of Economics, No. 64, pp. 629-653 (Ref. 39).
69. See Llewellyn (2001) Is bank supervision central to central banking?', The Quarterly Journal of Economics, No. 64, pp. 629-653(Ref. 54).
70. In Ref. 54 these functions were defined as payment system management and liquidity management.
71. Schoenmaker (2003) Is bank supervision central to central banking?', The Quarterly Journal of Economics, No. 64, pp. 629-653 (Ref. 9).
72. Padoa Schioppa (2003) Is bank supervision central to central banking?', The Quarterly Journal of Economics, No. 64, pp. 629-653 (Ref. 13).
73. Goodhart and Schoenmaker (1995) Is bank supervision central to central banking?', The Quarterly Journal of Economics, No. 64, pp. 629-653 (Ref. 45).
74. Eijffinger (2001) Is bank supervision central to central banking?', The Quarterly Journal of Economics, No. 64, pp. 629-653 (Ref. 19).
75. Vives (2001) Is bank supervision central to central banking?', The Quarterly Journal of Economics, No. 64, pp. 629-653 (Ref. 20).
76. Goodhart, C., Shoenmaker, D. and Dasgupta, P. (2002) ‘The skill profile of central bank and supervisors’, European Finance Review, No. 6, pp. 539-560.
77. See Oosterloo, S. and De Haan, J. (2003) ‘An institutional framework for financial stability’, Occasional Studies-De Nederlandsche Bank, Vol. 1, No. 4.
78. Alternatively, the different levels of central bank involvement can be measured using the identical scale of the FAC Index (called the CBFA Two Index): 1 = the central bank has responsibility in no sector; 3 = the central bank has responsibility in one sector; 5 = the central bank has responsibility in two sectors; 7 = the central bank has responsibility in all three sectors. The econometric performances of the two indices (CBFA and CBFA Two) are obviously equal, see Masciandaro (2004) (Ref. 24).
79. Following the classification introduced in Ref. 54 and used in Ref. 65, without supervision responsibility is considered to mean any central bank involved only in payment system management and liquidity management (and consequently crisis procedures).
80. Obviously, a difference of 0.1 between two values of the FAC Index, that range from 0 to 7, means a 1 per cent gap, while the same difference between two values of the CBFA Index, that range from 0 to 4, means a 2 per cent gap.
81. Theoretically, the design of the financial supervision architecture can be explained using a political delegation approach. For more details see Masciandaro (2004) (Ref. 24).
82. See Llewellyn (2001) (Ref. 54).
83. See Masciandaro (2004) (Ref. 24).
84. Masciandaro and Porta (2004) (Ref. 7).
85. For the econometric details, see Masciandaro (2004) (Ref. 24)
86. Masciandaro and Porta (2004) (Ref. 7).
87. Furthermore, the econometric studies argued that the unification of financial supervision seems to be a more markedly European phenomenon, linked especially to the Germanic and Scandinavian roots of the legal institutions. From the statistical point of view, the UK case seems to be the so-called ‘outlier’ (atypical observation), a country case that has to be explained with a specific institutional historical analysis (ie the role of the banking crisis represented by the BCCI case in determining the establishment of the FSA). For more details on the econometric results, see Masciandaro (2004) (Ref. 24).
88. Masciandaro and Porta (2004) (Ref. 7).
89. Barth, J. R., Caprio, G. Jr. and Levine, R. (2001) ‘The regulation and supervision of bank around the world: A new database’, in Litan, R. E. and Herring, R. (eds) ‘Integrating emerging market countries into the global financial system’, Brookings-Wharton Papers on Financial Services, Brookings Institution Press, empirically analyse the relationship between specific regulatory measures (capital ratios, deposit insurance, inspection rules, etc), some bank performance indicators (asset growth, intermediation margin, costs, loan losses) and institutional indicators (corruption). The difference from the analysis described here is evident: the object of analysis is the general design of the controls, not the individual rules of supervision. Above all, however, this work does not resolve the difficulties pointed out here: even individual supervisory measures have changed in various countries in recent years, so saying that all the data already fully reflect the effects of reforms is a rather bold statement; secondly, a complete judgment on the effects produced is not possible, since the set of performance indicators used is obviously partial.
90. Barth et al. (2002) ‘Integrating emerging market countries into the global financial system’ (Ref. 32) examine the relationship between the structure, scope and independence of bank supervision and bank profitability. The results indicate a weak relationship, and-more importantly for methodological remarks here-the authors’ estimates made using an alternative source of data failed to duplicate this result.
91. Demirgüç-Kunt, A., Laeven, L. and Levine, R. (2003) ‘Regulations, market structure, institutions, and the cost of financial intermediation’, NBER Working Paper, n. W9620, examine the impact of bank regulations on bank interest margins and overhead costs. Bank regulations become insignificant, however, when controlling for national indicators of economic freedom or protection of property rights, which represent structural institutional variables in this paper’s terminology.
92. Beck, T., Demirgüç-Kunt, A. and Levine, R. (2002) ‘Bank supervision and corporate finance’, NBER Working Paper, n. W9620, examine the impact of bank supervision on the financial obstacles faced by corporations across 49 countries; the data are based on survey questions. Again the above remarks can be applied: here there are the perceptions by specific economic agents of the effects of supervision on a specific set of indicators.
93. This approach is followed in Masciandaro (2004) (Ref. 24).
94. For the new political economy approach, see Persson, T. and Tabellini, G. (2000) ‘Political economy: Explaining economic policy’, MIT University Press, Cambridge MA.